Source: Frontier Securities                          Date: 27 July, 2011

At a media briefing last week UB Railways representatives said the decision to increase by 15% the rate to transport domestic coal was not against the principles of fair competition and consumer rights. It was a commercial decision meant to cut down on escalating losses. Transportation of domestic coal has for many years been a loss-making service, and in 2010 the Railways incurred losses of MNT16 billion from transporting 5.7 Mt of coal. The increased rates would still leave 38% of the losses uncovered, but the quantum of loss is unlikely to drop below MNT16 billion as the volume of freight will be rising. The price of coal has been raised 19 times since 1990, but this was only the third time freight rates have gone up. The Railways does not rule more increases. Revenue from copper and iron ore transportation subsidize the losses from coal, construction materials, foodstuffs and passenger transportation.

An expert on Mongolian mining, Dr. Graeme Hancock feels the present decision will further increase the costs of freight movement on the northeastern route, encouraging miners to ship coal to the south. He thinks it is possible the Railways will offer special rates for bulk shipments north. The sector does not see the rise impacting export as it is mostly mines near the border that export their output. Hardest hit would be producers such as Baganuur and Shivee Ovoo, where, interestingly, the government has stakes.